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The Term Spread and GDP Growth in Australia

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  • Jacob Poke

    (School of Economics and Finance, University of Tasmania)

  • Graeme Wells

    (School of Economics and Finance, University of Tasmania)

Abstract

This paper analyses the e¤ectiveness of the spread between short and long term interest rates for predicting GDP growth in Australia, and whether the predictive relation deteriorates, as theory suggests, with the adoption of a credible ination-targeting regime. We test whether predic- tive power is sensitive to inclusion of other conditioning variables which may be useful in forecasting GDP growth, and whether forecasting sig- ni cance is due primarily to the expected change in short-term interest rates, the term premium, or a combination of the two. In a simple bivari- ate model, results strongly suggest that the shift to a credible ination- targeting regime has reduced the predictive content of the term spread. However, extensions to this basic model tend to undermine this result. The predictive power of the term spread in Australia may have been over- sold.

Suggested Citation

  • Jacob Poke & Graeme Wells, 2007. "The Term Spread and GDP Growth in Australia," Working Papers 2508, University of Tasmania, Tasmanian School of Business and Economics, revised Nov 2007.
  • Handle: RePEc:tas:wpaper:2508
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    File URL: http://eprints.utas.edu.au/2508/
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    References listed on IDEAS

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    4. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
    5. I.J. Macfarlane, 1998. "Shann Memorial Lecture: Australian monetary policy in the last quarter of the twentieth century," Economics Discussion / Working Papers 98-22, The University of Western Australia, Department of Economics.
    6. Lars E. O. Svensson, 1999. "Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
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    Cited by:

    1. Robert J. Bianchi & Michael E. Drew & Timothy Whittaker, 2016. "The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-18, December.
    2. Jiyoung Lee, 2015. "Disentangling the Predictive Power of Term Spreads under Inflation Targeting," International Economic Journal, Taylor & Francis Journals, vol. 29(3), pages 419-450, September.
    3. Watson, John & Wickramanayake, J., 2012. "The relationship between aggregate managed fund flows and share market returns in Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 451-472.

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